Last month, the General Accounting Office issued a pair of reports that I quickly printed out and reserved for what I and countless others who travel to work via public transportation call “commuter reading.”

One was a report on the sad state of professional boxing - a sport of which, at times, I’m ashamed to admit I’m a fan - and the other, a 147-page study on the effects of firm consolidation in the profession.

For the most part, both reports contained few surprises. Like anyone needs to be told that fighters lack an adequate health and pension plan, or that the sport needs a national commissioner. Ditto for much of the tome on mergers and their potential effects on reduced competition in the future.

The GAO said that the recent merger-mania of accounting firms could potentially result in reduced competition and a dwindling choice of audit firms for SEC clients.

It breaks down like this: Since 2002, the Big Four audit 78 percent of public companies, and a gargantuan 99 percent of the market in terms of public company annual sales. In the GAO’s own parlance, this is known as a “tight oligopoly.”

In the 1980s, we had the Big Eight, but the combination of industry mergers and Enron has literally halved that roster. As a result, audit clients have 50 percent of the SEC firms they had 15 years ago. Compound that with the fact that certain firms dominate certain markets. For example, the report noted that PricewaterhouseCoopers audits 76 percent of the petroleum and coal concerns, while rival KPMG audits 60 percent of financial institutions (excluding banks).

Therefore, it should come as a surprise to exactly no one that smaller firms still face some mammoth barriers to entry into the public audit market.

Some of the hurdles the small fry have to overcome include lack of staff, industry and technical expertise, capital formation and global reach, according to the report. In fact, 88 percent of public companies surveyed by the GAO indicated that they would not consider using a non-Big Four firm for audit and attest services.

To blunt further consolidation, the GAO addresses the possible exit of another Big Four firm, and legal and regulatory strategies regarding possible intervention.

And this, folks, is where it gets interesting.

The report addresses criticisms that the Justice Department may have acted overzealously in its prosecution of Andersen as a firm, instead of only the persons responsible for the Enron debacle. According to the GAO, the government should, when appropriate, hold partners and employees accountable.

In its own vernacular, the GAO warns, “However, it is equally important that concerns about the firms’ viability be balanced against the firms’ believing they are ‘too few to fail’ and the ensuing moral hazard such a belief creates.”

Philosophical to be sure, but are they intimating what I think they are? That, for fear of another major firm collapse, any criminal charges should be weighed against the possibility of the firm closing its doors and, thus, reducing competition even further?

I won’t rush to judgement on this. Yes, as Sarbanes-Oxley takes stronger root, there is the possibility that things will get worse before the storm clouds dissipate.

If not, then we may have to get used to government-run audits.

Bill Carlino

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